Mortgage applications rose as rates fell in the FOMC wake

The MBA Applications Index rose 5.5% after rising 11% the week before. Mortgage applications have dropped off a cliff ever since rates began increasing last spring. Both purchases and refinances drove the increase. The summer selling season is winding down, and we’re entering a slow period that will last through the winter months. Last year, refinance activity drove business for mortgage bankers. Now, they’ll have to rely on purchase activity, which tends to be very seasonal.

Originators breathe a sigh of relief as the Fed maintains its pace of asset purchases

Last week, the Federal Open Market Committee voted to maintain its current pace of asset purchases after warning the market it would begin to taper last spring. The surprise move caught the market leaning the wrong way, and short covering drove a swift rally in bonds. Many people who had thought they missed their window to refinance or purchase a home took advantage of the dip in rates.

Survey of the landscape for REITs that focus on origination

The mortgage market is undergoing a massive transformation as the private label mortgage market returns. Bob Corker (R-TN) and Mark Warner (D-VA) recently introduced a bill to end GSEs (government-sponsored enterprises) and put the government in a re-insurance role. All the securitization that was done by Fannie Mae and Freddie Mac will now be done by private entities, some of whom could be mortgage REITs. Recently, President Obama laid out his plan for the future of mortgage origination, and it looked very similar to the Corker Warner bill.

Since the bubble burst, mortgage origination has been almost exclusively government-driven. The big buyers of new origination have been the agency REITs like Annaly (NLY) and American Capital (AGNC). The U.S. government bears 50% of the credit risk of the entire U.S. mortgage market. Originators typically don’t hold their mortgages: they either sell them to the big banks or securitize them. Since the securitization market has been dead, originators have no outlet for non-agency mortgages. Redwood Trust (RWT) has been the only issuer of private-label mortgage-backed securities (securities backed by mortgages that aren’t government-guaranteed), and it has focused exclusively on high-quality jumbo loans. Pennymac (PMT) noted on its call that origination increased nicely in the second quarter.

In the beginning of the year, we saw a wave of private label deals, but subsequently, spreads have widened and the deal flow has slowed. The vast majority of the deals were extremely high-quality loans with significant over-collateralization, so they look nothing like the private label deals done at the end of the bubble. The sense is that more deal flow will happen once the government settles on how it wants to regulate private-label securitizations. Finally, increases in origination will help servicers like Nationstar (NSM) and Ocwen (OCN). Servicing has increased in value tremendously ever since rates started rising, with newly originated conforming mortgage servicing rights trading at 4x cash flow.